REIT ASIAPAC
COVER STORY
Manyata Embassy Business Park (phase 1)
REIT regulations, which require us to seek unitholder approval in
the event that we propose to go beyond a 25% leverage. There is
an absolute cap at 49%.
“With us, rents are expected to grow
from our initial 8%, and the three-year
forecast in our prospectus showed a 15%
compounding growth. At the end of that
ten years, if that tenant moves out when
the lease expires or they stay, we’ll get a
newly updated market rental.”
An interesting aspect is that the cost of debt is
higher than the dividend you’re paying out. It
would make commercial sense to be at zero
debt in India right now. What is your view?
From top left: Express Towers, Nariman Point, Mumbai, First International Finance Centre, Bandra Kurla
Complex, Embassy One. (Bengaluru), Mumbai, Manyata Embassy Business Park (Phase 2),
Blackstone is a sponsor of the REIT. To what
extent are the assets owned by Blackstone and/ or
developed by Embassy, and to what extent did you
go out and collate assets from multiple parties?
What’s your leverage strategy? What’s your
optimal leverage and the cost of debt?
Post-listing, our leverage is at sub-15%. It was at 28% pre-listing
and the majority of the proceeds from the IPO would be used to
retire debt. We are comfortable to take leverage levels up over
a period of time in order to take advantage of value accretive
acquisition opportunities. Having that low level of debt will allows
us to have the firepower to go out and acquire new assets in due
course. The cost of debt is in the low to mid 9%. Debt levels are
capped under the SEBI (Securities and Exchange Board of India)’s
The portfolio of assets has been assembled over a number of
years by both sponsors. Blackstone and Embassy came together
on the first assets in the portfolio in 2012. Roughly half of the
portfolio comes from the joint-venture properties between
Embassy and Blackstone, and the other half are properties that
Blackstone had acquired independently over a number of years.
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You have to consider the levels of potential growth that we’ve
got in our portfolio. The initial yield that we were talking about
before the IPO was in excess of 8%. We have also outlined how
our distributions are projected to grow over the next three years
in the prospectus, and that growth comes from the contracted
rental increases that are there in our portfolio. There are some
variations, but broadly speaking, market rental is growing at
about 7%, with some parts at 10% and in others, it has been
12%. Hence, market rentals are rising faster than our contracted
rental growth, which is about 5% per annum. Consequently,
rents are growing, and therefore, our projected distributions
are increasing every year. In addition, we have a mark-to-market
on our rentals at expiry of each lease across the portfolio. We
are about 34% under-rented. Whenever we have a lease expiry,
we aim to capture that mark-to-market and therefore further
increases the income that gets channeled to distributions.
Another growth area is what we call on-campus development.
As of March 27, 2019, we have more than 2.5 million sq. ft. of
real estate under construction. Once that comes on stream and
is leased and occupied, it will also add to the rental growth, and
that is without any cognizance being taken of yield compression
and capital value appreciation.
What you have explained addresses the
question around the office market, which is
generally in growth mode with rents rising
at about 7 to 10% per annum in different
properties. How about capital values?
Our business model is not dependent upon cap values and cap
rate compression. Of course, if your rental is growing, then your
asset value will grow proportionately. There has been a cap rate
compression in the market over a number of years. The market
will always speculate about what’s going to happen to that in
the future. However, the growth that we’re talking about here
is growth in our base rental income from existing and newly
constructed buildings.
The debt that we currently have in the portfolio is primarily
to deal with and address buildings that are currently under
construction, and therefore not income-producing. Once they
become income-producing, we’ll look at how we deal with that
debt, whether we refinance it or retire it. However, the rental
growth within the portfolio justifies having that debt.
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